Transition Guidance

The slope to Debt Hell can be fast and slick, especially on an E-4's salary in an urban area with a high cost of living. The car needs new tires before winter, so they get purchased on a credit card. Then come Christmas gifts for the family: Put them on the Army and Air Force Exchange System charge card. And who can resist a new 50-inch HDTV during the Super Bowl when there's no need to dig into their pockets until months later?

By the time spring rolls around, those credit card statements in the mailbox need an R rating for graphic horror. The balances may go up more often than down. More and more of that Pentagon paycheck goes to pay debts. The total balances get higher and higher while all you and the family can afford is the minimum monthly payment.

As Tom Hanks says in the movie Apollo 13, "Ah, Houston, we have a problem".

Stop right there. It's time to get some help.

Study Your Spending:

Plenty of free, confidential help is available. Debt-plagued service members and families, in particular, who can get financial counseling at a base family services office.

Some may even qualify for grants or no-interest loans from Army Emergency Relief, Air Force Aid Society, Navy-Marine Corps Relief Society, or Coast Guard Mutual Assistance.

The relief societies provide aid based on the applicant's circumstances. They will not pay credit card bills, but can help service members facing a short-term financial emergency, such as not having enough money for a necessary car repair.

Getting help can make the difference between financial discomfort and financial ruin for some service members.

"Some of them, they are losing their cars because they cannot make payments. They are losing homes because they cannot make payments," says Mildred Quinones, director of the financial assistance program for Army Community Service at Fort Belvoir, Va.

The societies typically require that applicants be working with a military financial counselor, Quinones says. Counselors can help you create a family budget, figure out exactly how much you owe and establish a debt repayment plan.

But the first step toward getting out of debt is improving your financial record keeping, Quinones says. People commonly encounter debt problems because they have no monthly budget and don't know exactly how much they owe.

"The majority of people who come in and look for counseling, they have a lot of difficulties because they have not done their homework," Quinones says.

Automatic teller machine cards don't help. They enable people to fetch a fresh wad of cash almost anywhere, anytime. Eventually many families burn through their monthly income without tracking where it goes.

"A lot of people will tell me 'Hey, I just took $200 out of the ATM machine. Where did it all go?'" says financial planner Ric Edelman of Fairfax, Va. "You really need to track your expenses. You've got to know where all of your money is going."

Counselors suggest tracking every single penny for at least a month, even the 2 dollars spent in an instant for a highway toll or a cup of coffee. There are some great financial tracking smart phone and online apps out there, or even a small notebook will work.

The accounting also should include long-term bills, broken down on a monthly basis. For example, a $360 car insurance payment made every six months amounts to $60 on the monthly budget.

Sacrifices May Be Small:

After the family knows where its money is being spent each month, it is possible to decide where to find the money to pay off debts.

"A lot of people find if they can cut down on some of the eating out and some of their weekend spending, they can pay off their debts and accomplish their financial goals," says Joanne Kerstetter, president of the Consumer Credit Counseling Service of Greater Washington.

Many families take a beating from what seem like the smallest of expenses, according to Edelman, author of the national best seller, "The Truth About Money (4th Edition)", a user-friendly guide to saving, budgeting and investing.

For example, if a husband and wife each spends $5 or $6 at work each day on coffee, soda and snacks, that adds up to about $2,000 by the end of the year, which translates to about $3,000 in gross income, assuming they're in the 28 percent tax bracket.

"People who go to buy that soda say, 'It's only a dollar, what's the big deal,' " Edelman says. "Well, it's a tremendously big deal. You're going broke pennies at a time."

Quinones can show any military family how to squeeze $100 to $200 from their monthly budget, regardless of their rank, marital status or housing situation. Her ideas include canceling cable television, packing lunch rather than eating out, and shopping carefully.

Plugging the Money Holes:

Having established a budget and determined the maximum amount available for debt payments each month, you can start paying off those balances.

Many counselors can help by negotiating lower interest rates with creditors. (See related story following entitled "The Best Deals in Credit Cards")

"Creditors are a lot more willing to work with families who contact them and let them know exactly what's going on in the household," Kerstetter says.

Many counselors recommend paying off the debt that has the highest interest rate first. Using this strategy, you send the minimum monthly payment to each creditor, then plow every remaining dollar into the debt with the highest interest rate.

"If you've got four or five bullet holes, which one are you going to treat first? The one that's causing you the most damage," says Edelman. After that debt is paid off, you move to the debt with the next highest interest rate, but you maintain the same budget for debt payments each month.

Quinones also recommends what she calls the "power payment." If one of the debts has a small balance, such as $300, the debtor can wipe out that debt first to establish a sense of accomplishment. People in large amounts of debt "feel great about that," she says. "When it takes so long to pay something off, they get frustrated."

Debt-ridden consumers who want less power over their money can turn their money over to a third party: the Consumer Credit Counseling Service. A national nonprofit organization with more than 1,000 offices, the CCCS has a debt management plan for clients. The debtor writes one check to CCCS, and the office distributes payments to creditors according to the proportion of debt owed to each.

Last Resorts are Consolidation, Bankruptcy:

Although it may seem odd, yet another credit card may help pay off debt - provided the card has a lower rate than the others.

Some consumers can qualify for rates as low as 5 percent, then transfer to that card balances from other cards charging more typical market rates of 15 to 20 percent.

But be sure to read carefully the terms of any such offer before applying, says Glenda Burton, assistant vice president for credit card underwriting resolutions at the USAA Federal Savings Bank in San Antonio.

Teaser rates typically expire after six months, at which point the rate may climb dramatically, Burton says.

As a general rule, she says, families should avoid getting too many credit cards. The amount of your "contingent liability" - the maximum you can borrow on all your cards combined - can count against you when you apply for a car loan or mortgage, she says.

For example, if you have a credit card with a $5,000 limit but a balance of only $2,000, some mortgage companies may count that as a $5,000 debt.

There is no law that tells lenders how to count available credit in evaluating whether to give someone a loan, Burton says. Their policies differ. But she has found that many banks count credit limits, not just balances.

The last resort for debt-plagued consumers is to seek bankruptcy protection. Filing in court for bankruptcy can help consumers start over by requiring them to pay only a small percent of their total liabilities. (See related story entitled, "An End or A Beginning?")

But bankruptcy has a price: Their credit report is scarred for 10 years. That is especially serious for service members and federal employees who must undergo security clearance investigations.

Of every 100 people seeking help from the Consumer Credit Counseling Service of Greater Washington, only seven are referred to lawyers to consider bankruptcy.

Thirty-four get out of debt by rearranging their monthly budget. Another 34 complete the service's debt management plan. The remaining 25 are referred for job counseling or another service, says Kerstetter, the agency's president.